    [House Hearing, 110 Congress]
    [From the U.S. Government Publishing Office]

                             BUSINESS ACTIVITY TAX
                           SIMPLIFICATION ACT OF 2008

    =======================================================================

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
                       COMMERCIAL AND ADMINISTRATIVE LAW

                                     OF THE

                           COMMITTEE ON THE JUDICIARY
                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED TENTH CONGRESS

                                 SECOND SESSION

                                       ON

                                   H.R. 5267

                                   __________

                                 JUNE 24, 2008

                                   __________

                               Serial No. 110-187

                                   __________

             Printed for the use of the Committee on the Judiciary

          Available via the World Wide Web: http://judiciary.house.gov

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                           COMMITTEE ON THE JUDICIARY

                     JOHN CONYERS, Jr., Michigan, Chairman
    HOWARD L. BERMAN, California         LAMAR SMITH, Texas
    RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr.,
    JERROLD NADLER, New York                 Wisconsin
    ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
    MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
    ZOE LOFGREN, California              BOB GOODLATTE, Virginia
    SHEILA JACKSON LEE, Texas            STEVE CHABOT, Ohio
    MAXINE WATERS, California            DANIEL E. LUNGREN, California
    WILLIAM D. DELAHUNT, Massachusetts   CHRIS CANNON, Utah
    ROBERT WEXLER, Florida               RIC KELLER, Florida
    LINDA T. SANCHEZ, California         DARRELL ISSA, California
    STEVE COHEN, Tennessee               MIKE PENCE, Indiana
    HANK JOHNSON, Georgia                J. RANDY FORBES, Virginia
    BETTY SUTTON, Ohio                   STEVE KING, Iowa
    LUIS V. GUTIERREZ, Illinois          TOM FEENEY, Florida
    BRAD SHERMAN, California             TRENT FRANKS, Arizona
    TAMMY BALDWIN, Wisconsin             LOUIE GOHMERT, Texas
    ANTHONY D. WEINER, New York          JIM JORDAN, Ohio
    ADAM B. SCHIFF, California
    ARTUR DAVIS, Alabama
    DEBBIE WASSERMAN SCHULTZ, Florida
    KEITH ELLISON, Minnesota

                Perry Apelbaum, Staff Director and Chief Counsel
          Sean McLaughlin, Minority Chief of Staff and General Counsel
                                     ------

               Subcommittee on Commercial and Administrative Law

                    LINDA T. SANCHEZ, California, Chairwoman

    JOHN CONYERS, Jr., Michigan          CHRIS CANNON, Utah
    HANK JOHNSON, Georgia                JIM JORDAN, Ohio
    ZOE LOFGREN, California              RIC KELLER, Florida
    WILLIAM D. DELAHUNT, Massachusetts   TOM FEENEY, Florida
    MELVIN L. WATT, North Carolina       TRENT FRANKS, Arizona
    STEVE COHEN, Tennessee

                         Michone Johnson, Chief Counsel

                        Daniel Flores, Minority Counsel

                                C O N T E N T S

                                  ----------

                                 JUNE 24, 2008

                                                                       Page

                                    THE BILL

    H.R. 5257, the ``Business Activity Tax Simplification Act of
      2008''.........................................................     2

                               OPENING STATEMENTS

    The Honorable Linda T. Sanchez, a Representative in Congress from
      the State of California, and Chairwoman, Subcommittee on
      Commercial and Administrative Law..............................     1
    The Honorable Jim Jordan, a Representative in Congress from the
      State of Ohio, and Member, Subcommittee on Commercial and
      Administrative Law.............................................    12
    The Honorable Lamar Smith, a Representative in Congress from the
      State of Texas, and Ranking Member, Committee on the Judiciary.    14

                                   WITNESSES

    The Honorable Rick Boucher, a Representative in Congress from the
      State of Virginia
      Oral Testimony.................................................    17
      Prepared Statement.............................................    19
    The Honorable Bob Goodlatte, a Representative in Congress from
      the State of Virginia
      Oral Testimony.................................................    20
      Prepared Statement.............................................    21
    Mr. Mark Ducharme, Vice President and CFO, Monterey Boats,
      Williston, FL
      Oral Testimony.................................................    24
      Prepared Statement.............................................    27
    Mr. R. Bruce Johnson, Commissioner, Utah State Tax Commission,
      Salt Lake City, UT
      Oral Testimony.................................................    31
      Prepared Statement.............................................    33
    Mr. Michael Petricone, Vice President, Technology Policy,
      Consumer Electronics Association, Arlington, VA
      Oral Testimony.................................................    43
      Prepared Statement.............................................    45
    Mr. David C. Quam, Director, Office of Federal Relations,
      National Governors Association, Washington, DC
      Oral Testimony.................................................    50
      Prepared Statement.............................................    51

              LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

    Prepared Statement of the Honorable John Conyers, Jr., a
      Representative in Congress from the State of Michigan,
      Chairman, Committee on the Judiciary, and Member, Subcommittee
      on Commercial and Administrative Law...........................    14
    Prepared Statement of the Honorable Steve Cohen, a Representative
      in Congress from the State of Tennessee, and Member,
      Subcommittee on Commercial and Administrative Law..............    15
    Prepared Statement of the Honorable Trent Franks, a
      Representative in Congress from the State of Arizona, and
      Member, Subcommittee on Commercial and Administrative Law......    16

                                    APPENDIX
                   Material Submitted for the Hearing Record

    Answers to Post-Hearing Questions from Mark Ducharme, Vice
      President and CFO, Monterey Boats, Williston, FL...............    68
    Answers to Post-Hearing Questions from R. Bruce Johnson,
      Commissioner, Utah State Tax Commission, Salt Lake City, UT....    71
    Answers to Post-Hearing Questions from Michael Petricone, Vice
      President, Technology Policy, Consumer Electronics Association,
      Arlington, VA..................................................    77
    Post-Hearing Questions submitted to David C. Quam, Director,
      Office of Federal Relations, National Governors Association,
      Washington, DC.................................................    80
    Statements Submitted for the Record..............................    82

                             BUSINESS ACTIVITY TAX
                           SIMPLIFICATION ACT OF 2008

                                  ----------

                             TUESDAY, JUNE 24, 2008

                  House of Representatives,
                         Subcommittee on Commercial
                                and Administrative Law,
                                    Committee on the Judiciary,
                                                        Washington, DC.

        The Subcommittee met, pursuant to notice, at 1:10 p.m., in
    room 2237, Rayburn House Office Building, the Honoorable Linda
    Sanchez (Chairwoman of the Subcommittee) presiding.
        Present: Representatives Conyers, Sanchez, Johnson,
    Lofgren, Delahunt, Smith, Jordan, and Feeney.
        Staff present: Norberto Salinas, Majority Counsel; Stewart
    Jeffries, Minority Counsel; and Adam Russell, Majority
    Professional Staff Member.
        Ms. Sanchez. This hearing of the Committee on the
    Judiciary, Subcommittee on Commercial and Administrative Law
    will now come to order.
        Without objection, the Chair will be authorized to declare
    a recess of the hearing at any point.
        I am now going to recognize myself for a short statement.
        The growth of marketing and sales of goods and services
    over the Internet is just one example of our country's movement
    toward an economic system not limited by State borders.
        But this borderless economy has led to confusion for some
    businesses regarding their tax obligations. Although a State
    levies taxes on companies conducting business within the State,
    some companies have expressed concerns that they are unaware
    when their activities trigger State tax obligations.
        These companies favor a physical presence standard for
    taxation. In essence, the standard would require businesses to
    pay taxes to States in which they own or lease property or
    effectively station employees.
        On the opposing side are the State governments. They oppose
    such an approach contending that, in the future, because more
    transactions and services will occur online, the physical
    presence standard would eviscerate State revenues and prompt
    tax avoidance schemes.
        The question then becomes how do you clarify the taxation
    standard while protecting State revenues and taxing
    authorities.
        The legislation we are examining today is H.R. 5267, the
    ``Business Activity Tax Simplification Act of 2008.''
        [The bill, H.R. 5267, follows:]

        Ms. Sanchez. This bill would prohibit State taxation of
    interstate commerce of out-of-state transactions involving all
    forms of property.
        The legislation would also establish the physical presence
    standard advocated by business interests.
        This afternoon's hearing serves a dual purpose. First, this
    hearing provides us with the opportunity to learn more about
    business activity taxes and under what circumstances they are
    levied.
        Second, the testimony provided today will help us determine
    what role Congress has in this matter and whether H.R. 5267
    addresses the concerns of businesses that are expected to pay
    these types of taxes while also protecting the interests of
    State governments to tax business activity within their
    borders.
        To help us explore these issues, we have six witnesses
    divided into two panels for this hearing.
        For our first panel, we have Representatives Rick Boucher
    from the 9th District of Virginia and Bob Goodlatte from the
    6th District of Virginia, the authors of the legislation. And
    they will discuss H.R. 5267.
        For our second panel, I am pleased to have Mark Ducharme,
    vice president and CFO of Monterey Boats; R. Bruce Johnson,
    commissioner of the Utah State Tax Commission; Michael
    Petricone, vice president of technology policy at the Consumer
    Electronics Association; and David Quam, director of Federal
    relations at the National Governors' Association.
        As we hear today's testimony, let us remember that we must
    balance the interests of State governments to collect revenue
    with efforts to encourage business development.
        Accordingly, I look forward to this afternoon's hearing and
    see it as the beginning of a dialogue on this issue.
        I now would like to recognize my colleague, Mr. Jordan, our
    acting Ranking Member of the Subcommittee for any opening
    remarks he may have.
        Mr. Jordan. Thank you, Madam Chair.
        Ranking Member Cannon is unable to make the hearing today
    because of the Utah primary. He extends his regrets.
        Today we consider H.R. 5267, the ``Business Activity Tax
    Simplification Act of 2008,'' a measure intended to provide
    greater clarity to businesses in navigating the tax landscape.
        This bill was introduced by Representative Rick Boucher on
    February 26, 2008, and has 26 co-sponsors.
        Representative Bob Goodlatte, who sponsored similar
    measures in previous Congresses, is the primary Republican co-
    sponsor of the legislation.
        H.R. 5267 is designed to address a fundamental problem
    relating to interstate commerce. Specifically, when is a State
    justified in taxing a business with little or no physical
    connection with the State?
        Congress has examined this issue from time to time over the
    years. Now, with the emergence of the Internet economy and the
    explosion of the service industries, the need for clear,
    concise taxation standards has become even more urgent.
        In 1995, Congress enacting Public Law 86-272, still
    enforced today, prohibiting States from imposing a business
    activity tax on companies whose only contact with the State is
    the solicitation of orders for tangible goods.
        In addition, since 1959, many States appear to have engaged
    in practices that are at odds with the meaning and the intent
    of Public Law 86-272.
        For example, States have begun to impose a tax on companies
    business activities on gross receipts rather than on net
    income.
        These developments have wreaked havoc on businesses. These
    businesses have incurred great expense in attempting to
    decipher and, in many cases, litigate the appropriate nexus
    standard for business activity taxes.
        H.R. 5267 would provide some certainty to this issue. It
    would amend Public Law 86-272 to be able to apply to
    solicitation activities in connection with all sales not just
    sales of tangible personal property.
        It would also cover all business activity taxes, not just
    net income taxes.
        It establishes a bright line 15-day physical presence
    requirement for the imposition of business activity taxes and
    would codify the current physical presence standard observed
    for years and elaborated by the Supreme Court in 1992 in Quill
    v. North Dakota.
        In Quill, the Court required that in order to impose a
    requirement, that remote vendors collect and remit sales taxes
    for sales made to customers in the State the business must have
    a physical presence within the State.
        During the 107th, 108th, and 109th Congresses, Subcommittee
    considered similar measures sponsored by Mr. Goodlatte.
        The bill in the 107th Congress was reported out favorably
    by this Subcommittee though the full Judiciary Committee did
    not have an opportunity to consider it prior to conclusion of
    that Congress.
        In the 108th Congress, the Subcommittee did not have an
    opportunity to consider the bill further after a legislative
    hearing.
        And in the 109th Congress, the bill was favorably reported
    out of the Committee by voice vote but was not considered by
    the full House.
        I would note that supporters of this legislation have made
    a number of changes from previous versions in order to make the
    bill more palatable to the States.
        One such change was reducing the period of time that
    triggered tax liability from 21 days to 15. This bill also
    eliminates the number of exceptions to the physical presence
    test that were contained in earlier versions.
        As always, this bill enjoys wide support in the business
    community, including the Business Roundtable, the National
    Association of Manufacturers, the Motion Picture Association of
    America, and the Software and Information Industry Association,
    to name only a few.
        I recognize that the States continue to have a number of
    concerns about the legislation, both in terms of how it will
    impact their bottom line and its encroaching into traditional
    State taxation authorities.
        I hope that this hearing can begin a dialogue where both
    sides can try to reach an accommodation on this important issue
    for American businesses.
        I look forward to hearing from all our witnesses today.
        Thank you, Madam Chair.
        Ms. Sanchez. Thank you. I thank the gentleman for his
    statement, and I would like to recognize Mr. Smith, the
    distinguished Ranking Member of the Committee on the Judiciary
    for an opening statement if he wishes.
        Mr. Smith. Thank you, Madam Chair.
        First of all, I want to thank our colleagues from the
    Judiciary Committee, Congressman Boucher and Congressman
    Goodlatte, for introducing this piece of legislation.
        It is nice to see two Members of the Committee and two
    Virginians linking arms to pass such a good piece of
    legislation.
        H.R. 5267, the Business Activity Tax Simplification Act of
    2008, creates a physical presence requirement before State
    governments can collect income taxes or other business activity
    taxes on companies that conduct businesses in their States.
        Without such a physical presence requirement, companies
    must contend with dozens of different rules for determining
    when they owe State business activity taxes.
        The Business Activity Tax Simplification Act brings the law
    regarding business activity tax into line with the physical
    presence standard that Congress adopted for State sales taxes
    in 1959.
        This bill would list those conditions that a business must
    meet to establish a physical presence for the purposes of the
    imposition of a business activity tax by States.
        I supported similar legislation in the past because I think
    that businesses deserve some clarity as to when they will owe
    corporate income taxes.
        This bill also will make it easier for small businesses to
    determine their tax liability, and it will also limit the
    imposition of taxes for the simple act, for example, of driving
    goods across a State's highways.
        This legislation has tremendous support in the business
    community.
        We have received over 20 statements for the record in
    support of this legislation from business associations both
    large and small.
        At the same time, I recognize that some States have
    concerns about this legislation because of its impact on
    potential revenue.
        I know this Subcommittee has a history of asking the States
    and business stakeholders to sit down and talk about their
    differences when it comes to taxation, so I hope similar such
    talks can occur in the future about this legislation.
        And with that, Madam Chair, I will yield back.
        Thank you for yielding.
        Ms. Sanchez. I thank the gentleman for his statement.
        Without objection, other Members' opening statements will
    be included in the record.
        [The prepared statement of Mr. Conyers follows:]

    Prepared Statement of the Honorable John Conyers, Jr., a Representative
      in Congress from the State of Michigan, Chairman, Committee on the
     Judiciary, and Member, Subcommittee on Commercial and Administrative
                                      Law

        While Congress must ensure that the States do not burden interstate
    commerce through their taxing authority, the authority of States to tax
    activity within their borders must be respected. Clearly, we must
    carefully balance these competing interests.
        Today, we will consider H.R. 5267, the ``Business Activity Tax
    Simplification Act of 2008,'' which attempts to clarify when a State
    may tax a business with little or no physical connection with the
    State.
        The bill establishes a physical presence standard for business
    activity taxes, and amends Public Law 86-272 to protect from State net
    income tax obligations the solicitation of orders of all forms of
    property and services, not just tangible property.
        Establishing a uniform standard would potentially create certainty
    for businesses and State governments. The business community could
    presumably better plan its development by knowing when and where it is
    obligated to pay taxes.
        Imposing a physical presence standard, however, could drastically
    alter the taxing landscape. States now generally apply an economic
    presence standard, whereby a company is taxed based on whether it
    conducts business within the State.
        In this precarious economic environment, where State revenues are
    already in decline, we should be very careful in considering
    legislation that could further impact State revenues or present tax
    avoidance possibilities.
        At least with respect to legislation that was similar to H.R. 5267,
    it was estimated that lost State tax revenues could be as high as $8
    billion in the first year following enactment.
        I think we need to look carefully at this bill to see if it might
    have a similar negative impact on the States.
        I look forward to today's hearing, and hope it will achieve three
    critical objectives.
        First, it should serve as a robust venue where the current standard
    of economic presence, the extent of confusion presented by the current
    standard, and the bona fides of a new standard that would permit a
    State to tax only companies with a physical presence there can be
    thoroughly examined.
        Second, this hearing should allow us to focus on H.R. 5267, which
    responds to concerns put forward by the business community regarding
    confusing State tax obligations.
        Third, this hearing should serve to begin a dialogue on State
    business activity taxes that results in a standard that is predictable,
    respects State taxing authority, and provides for a balanced and fair
    tax system.
        I thank Chairwoman Sanchez for holding this important hearing, and
    I very much look forward to hearing today from the witnesses.

        [The prepared statement of Mr. Cohen follows:]

     Prepared Statement of the Honorable Steve Cohen, a Representative in
       Congress from the State of Tennessee, and Member, Subcommittee on
                       Commercial and Administrative Law

        The issue that H.R. 5267, the ``Business Activity Tax
    Simplification Act,'' seeks to address is a complex one. What is the
    proper scope of a state's authority to tax the business activity of an
    interstate business? Unfortunately, the Supreme Court has provided
    ambiguous guidance with respect to the constitutionally required nexus
    between a state and an interstate business that is needed for the state
    to be able to impose a business activity tax.
        H.R. 5267 is supposed to answer this question in favor of a
    ``physical presence'' nexus requirement and a limited definition of
    taxable business activity. Proponents of this bill contend that they
    seek uniformity and clarity with respect to the state tax obligations
    of businesses, and that the current patchwork of state and local tax
    laws concerning business activity places an unsustainable and
    impermissible burden on interstate commerce. Opponents, meanwhile,
    maintain that this bill, if enacted as written, would cost financially
    strapped states like Tennessee billions of dollars in lost tax revenue,
    and that will have a negative impact on state government services and
    employees. I do not see H.R. 5267 as the final answer to the issue of
    states' authority to impose business activity taxes. Rather, I hope
    that all the stakeholders will use this opportunity to engage in an
    honest and open discussion amongst them so as to reach consensus on
    establishing a clear and uniform standard with respect to business
    activity taxes.

        [The prepared statement of Mr. Franks follows:]

     Prepared Statement of the Honorable Trent Franks, a Representative in
        Congress from the State of Arizona, and Member, Subcommittee on
                       Commercial and Administrative Law

        Thank you, Madam Chair, for holding this critically important
    hearing on the ``Business Activity Tax Simplification Act of 2008.'' I
    would also like to express my appreciation to the witnesses for joining
    us here today to discuss this legislation.
        It is rare in this 110th Congress that a proposed law has drawn
    such diverse support across party lines. A brief glance at this
    legislation's cosponsors reveals some of the most ardent conservatives
    lining up with the most passionate liberals in support of this bill. It
    is equally rare in this Congress that a law has been considered which
    makes government less intrusive, business easier, and regulations
    clearer. Metaphorically, this bill is the white whale of this session.
    With bipartisan cooperation and sound policy, it unquestionably
    deserves the full backing of this subcommittee.
        First, I would like to address the concerns of the states, the most
    visible opponents of this legislation. They claim that the ``Business
    Activity Tax Simplification Act of 2008'' passes an unfunded mandate
    onto state governments. This mandate, according to the states, comes at
    an especially difficult financial time for their budgets. Yet financial
    irresponsibility on the part of the states does not provide an excuse
    for their laws to interfere with the flow of interstate commerce. Many
    studies, such as from the CATO Institute, document the reckless
    spending binge indulged in by state governments. I do not mean to take
    the financial problems now faced by the states lightly, but they have
    no business passing on their burden to the detriment of the national
    economy. Finally, it appears that the states tend to exaggerate the
    severity of this legislation's impact on tax revenues. The Tax
    Foundation notes that the estimated revenue loss for the states under
    similar legislation authored in the 109th Congress is roughly 0.1
    percent, so small that it falls within typical revenue estimate margins
    of error.
        This issue of overreaching state laws is not new. Before the
    Constitution, the United States was governed under the Articles of
    Confederation. Under these Articles, the federal government was
    powerless to ensure that interstate commerce flowed without burdensome
    impediments. States often engaged in trade wars with each other,
    grinding national commerce to a halt. As a remedy, the new Constitution
    drafted by the Founding Fathers gave Congress explicit authority in
    Article I to regulate commerce ``among the several states.'' This
    legislation clearly falls under the purview of the Commerce Clause and
    within Congress' enumerated powers.
        With this constitutional authority in mind, the ``Business Activity
    Tax Simplification Act of 2008'' modernizes a 49-year-old law to
    reflect the dramatic changes in the nature of our economy, which is
    increasingly reliant upon networks that cross state lines. In a time of
    slowing economic growth, confusing and irrational policies are the last
    thing that American workers and employers need. Business activity taxes
    are just that. Haphazardly applied and enforced, they unnecessarily
    impede the vibrant interstate commerce that fuels our powerful economic
    engine. As such, Congress has a legitimate and vital responsibility to
    act.
        In establishing guidelines based upon a ``physical presence''
    standard, this legislation gives much-needed legal clarity to small
    businesses hoping to expand their operations to other states. Some
    argue that states can work collectively to make their business activity
    taxes more succinct; yet it is for this very purpose, to address
    commerce issues that cross state lines, that the federal government
    exists! I urge all of my colleagues to support this common-sense,
    bipartisan legislation that protects the interstate economy so vital to
    the fabric of this nation. Madam Chair, I yield the balance of my time.

        I am now pleased to introduce the witnesses on our first
    panel for today's hearing.
        Our first witness is Congressman Rick Boucher.
        Mr. Boucher is serving in his thirteenth term in the U.S.
    House of Representatives and represents Virginia's 9th
    Congressional District.
        Prior to his election to Congress, he served for 7 years as
    a member of the Virginia State Senate.
        He is a native of Abingdon, Virginia.
        Congressman Boucher sits on the House Judiciary Committee,
    serving on the Courts, the Internet, and Intellectual Property
    Subcommittee.
        He also is a Member of the House Energy and Commerce
    Committee, serving on three Subcommittees: Energy and Air
    Quality, of which he is the Chairman; as well as
    Telecommunications and the Internet; and Commerce Trade and
    Consumer Protection.
        As Chairman of the Energy and Air Quality Subcommittee, he
    is uniquely positioned to influence Federal legislation
    relating to a broad range of energy-related issues including
    electricity generation and markets, cool use, pipeline safety,
    refineries, and the Clean Air Act.
        Mr. Boucher is the sponsor of H.R. 5267.
        Our second witness is Congressman Goodlatte. Mr. Goodlatte
    is in his eighth term and represents the 6th Congressional
    District of Virginia.
        Prior to serving in Congress, he was a partner in the law
    firm of Bird, Kinder, and Huffman.
        Congressman Goodlatte also served as district director for
    former Congressman Caldwell Butler.
        Congressman Goodlatte serves on the House Judiciary
    Subcommittee on Immigration, Citizenship, Refugees, Border
    Security, and International Law and on the Courts, the
    Internet, and Intellectual Property Subcommittee.
        In addition to serving on the House Judiciary Committee, he
    serves as the Ranking Republican on the House Agriculture
    Committee.
        Congressman Goodlatte has taken a strong interest in issues
    such as welfare reform and forestry policy.
        Mr. Goodlatte is an original co-sponsor of H.R. 5267.
        I want to thank you both for your willingness to
    participate in today's hearing.
        And without objection, your written statements will be
    placed into the record in their entirety.
        And we are going ask that you limit your oral remarks to 5
    minutes.
        You are, I am sure, more than intimate with the lighting
    system.
        Sometimes, we forget to start it, but you are forewarned.
        And, of course, if you are caught mid-sentence or mid-
    thought when your time expires, we will allow you to complete
    your thought before moving on.
        So with that, I am going to invite Mr. Boucher to please
    proceed with your testimony.

     TESTIMONY OF THE HONORABLE RICK BOUCHER, A REPRESENTATIVE IN
                  CONGRESS FROM THE STATE OF VIRGINIA

        Mr. Boucher. Chairwoman Sanchez, thank you very much for
    holding this hearing on what Bob and I both believe is a timely
    subject and, according to both of us, an opportunity to comment
    on the legislation that together we have introduced.
        We have been partnered in this exercise for many years, and
    continue to believe that this measure deserves passage and
    would commend it to the Subcommittee's consideration.
        I would note this afternoon that the measure is co-
    sponsored by 26 Members of the House.
        And I will just take a moment to list of Members of the
    House Judiciary Committee who, on a bipartisan basis, are
    supporting the legislation.
        Representatives Hank Johnson, Bobby Scott, Zoe Lofgren,
    Arthur Davis, Sheila Jackson Lee, Bob Wexler, Anthony Weiner,
    Elton Gallegly, Steve Chabot, Mike Pence, and Tom Feeney.
        So we do have, essentially, equal numbers of Democrats and
    Republicans on the full Committee co-sponsoring this measure.
        It is an urgently-needed modernization of a 49-year-old
    statute that determines when States can impose State income
    taxes on the sales of tangible personal property within that
    State.
        Reflecting the economy of its time, that five-decade-old
    statute only applies to State income taxes, and it only applies
    to the sales of tangible personal property.
        Over the years, States have adopted a series of business
    activity taxes that, in some respects, are proxies for the
    State income tax including, among others, gross receipts taxes
    and a range of license arrangements.
        And the States frequently seek to impose those taxes on
    out-of-state companies that have no physical presence within
    the State.
        And over the years, greater volumes of our national
    commerce have been in intangible products and services such as
    financial services and software.
        Our measure modernizes the old law by expanding it to
    address not just State income taxes but also that range of
    business activity taxes that serve as proxies in some cases for
    the State income taxes.
        And we also create situations where there is a more
    explicit bright-line standard for the circumstances in which
    those taxes can be imposed.
        For 49 years, the test has been whether or not an out-of-
    state company has a physical presence within the taxing State.
        We keep that standard, but we provide a much clearer
    definition of what constitutes a physical presence.
        The bill provides certainty for the States and for out-of-
    state companies alike by specifying that physical presence
    means having property or employees within the taxing State for
    at least days within a year.
        If that test is met, State business activity taxes can be
    imposed on the sales that take place within that State.
        In the absence of these needed changes, the current legal
    uncertainty is producing clearly undesirable result.
        And I will just mention several examples.
        In Louisiana, the threat of business activity taxes has
    been raised against companies that have no physical presence
    within the State but broadcast advertisements from out-of-state
    into the State of Louisiana.
        Several States have attempted to impose business activity
    taxes on credit card companies located outside the State based
    solely on the fact that in-state residents are subscribers to
    those credit card services.
        New Jersey has held trucks belonging to companies with no
    physical presence in New Jersey that were passing through the
    State in order to make deliveries in another State until
    business activity taxes sometimes ranging in the tens of
    thousands of dollars have been paid.
        Many other equally troubling examples could be cited, and I
    think some witnesses, perhaps, will mention some of them.
        Our legislation is a needed modification of an old law
    which is appropriate to the realities of today's national
    commerce.
        If offers a certainty that should be welcome to companies
    doing business across State lines and to the taxing authorities
    at the State level alike.
        I very much appreciate the Chairwoman's focus on this
    timely matter, her very balanced statement, and her indication
    of welcoming our views and a continued discussion on this
    subject.
        We very much look forward to working with you and the other
    Members of the Committee as your considerations continue.
        At the end of that process, it is very much our hope that
    we will be able to pass a law which provides a much-needed
    modernization of the term under which State business activity
    taxes can be imposed on out-of-state companies of them.
        Thank you very much, Madam Chairwoman.
        [The prepared statement of Mr. Boucher follows:]

     Prepared Statement of the Honorable Rick Boucher, a Representative in
                      Congress from the State of Virginia

        Chairwoman Sanchez, I appreciate your conducting today's hearing on
    the Business Activity Tax Simplification Act, which I introduced with
    my Virginia colleague Bob Goodlatte.
        The measure is cosponsored by 26 House Members, including our
    Committee colleagues Hank Johnson, Bobby Scott, Zoe Lofgren, Artur
    Davis, Sheila Jackson Lee, Bob Wexler, Anthony Weiner, Elton Gallegly,
    Steve Chabot, Mike Pence, and Tom Feeney.
        It is an urgently needed modernization of the 49-year-old federal
    statute that determines when states can impose state income taxes on
    the sale of tangible personal goods in the state.
        Reflecting the economy of its time, that five decade old law only
    applies to state income taxes and only to the sale within the state of
    tangible personal property.
        Over the years, states have adopted a series of business activity
    taxes that are proxies for the state income tax, including gross
    receipts taxes, licensing arrangements, and other charges which states
    frequently seek to impose on out of state companies.
        And over the years, greater volumes of our national commerce have
    been in intangible products and services, such as financial services
    and software.
        Our measure modernized the old law by expanding it to address not
    just state income taxes but business activity taxes as well.
        We also make the circumstances under which these taxes can be
    imposed on out of state companies explicit with a bright line standard.
        For 49 years the test has been whether the out of state company has
    a physical presence in the taxing state.
        We keep that standard, but we provide a clearer definition of what
    constitutes physical presence. The bill provides certainty for the
    states and out of state companies alike by specifying that physical
    presence means having property or employees in the state for at least
    15 days annually. If that test is met, state business activity taxes
    can be imposed on the sales that take place in the state.
        In the absence of these needed changes, the current legal
    uncertainty is producing undesirable results.
        In Louisiana, the threat of business activity taxes has been raised
    against companies that have no physical presence in the state but
    broadcast advertisements into the state from out of state.
        Several states have attempted to impose business activity taxes on
    credit card companies located outside the state, based solely on the
    fact that in state residents subscribe to the credit cards.
        New Jersey has held trucks belonging to companies with no physical
    presence in New Jersey that were passing through the state to make
    deliveries in another state until business activity taxes of tens of
    thousand of dollars were paid.
        Many other equally troubling examples can be cited.
        Our legislation is a needed modification of an old law which is
    appropriate to the realities of today's national commerce. It offers a
    certainty that should be welcome to both companies doing business
    across state lines and state taxing authorities alike.
        I appreciate the Committee's focus on this timely matter and look
    forward to working with you as we take further steps.

        Ms. Sanchez. Thank you, Mr. Boucher. We appreciate your
    testimony.
        At this time, I would invite Mr. Goodlatte to proceed with
    his testimony.

     TESTIMONY OF THE HONORABLE BOB GOODLATTE, A REPRESENTATIVE IN
                  CONGRESS FROM THE STATE OF VIRGINIA

        Mr. Goodlatte. Well, thank you, Madam Chairman. I
    appreciate the opportunity to testify. I appreciate your
    holding this hearing and your and the other Members of the
    Committee's interest in this important legislation.
        Many States and some local governments levy corporate
    income, franchise, and other taxes on out-of-state companies
    that conduct business activities within their jurisdiction.
        While providing revenue for States, these taxes also serve
    to pay for the privilege of doing business in a State.
        Over the past several years, a growing number of
    jurisdictions have sought to collect business activity taxes
    from businesses located in other States even though those
    businesses receive no appreciable benefits from the taxing
    jurisdiction and even though the Supreme Court has ruled that
    the Constitution prohibits a State from imposing taxes on basis
    that lack substantial connections to the State.
        This has led to unfairness and uncertainty, generated
    contentious, widespread litigation, and hindered business
    expansion as businesses shy away from expanding their presence
    in other States for fear of exposure to unfair tax burdens.
        I understand that some of our witnesses on the next panel
    will detail the specific examples of abuses that are occurring
    under the current ambiguous legal environment.
        Previous actions by the Supreme Court and Congress have
    laid the ground work for a clear, concise, and modern bright-
    line rule in this area.
        In the landmark case of Quill Corporation v. North Dakota,
    the Supreme Court declared that a State cannot impose a tax on
    an out-of-state business unless that business has a substantial
    nexus with the taxing State.
        However, the Court did not define what constituted a
    substantial nexus for purposes of imposing business activity
    taxes.
        In addition, over 40 years ago, Congress passed legislation
    to prohibit jurisdictions from taxing the income of out-of-
    state corporations whose in-state presence was nominal.
        Public Law 86-272 set clear, uniformed standards for when
    States could and could not impose such taxes on out-of-state
    businesses when the business activities involved the
    solicitation of orders for sales.
        However, like the economy of its time, the scope of Public
    Law 86-272 was limited to tangible personal property.
        Our nation's economy has changed dramatically over the past
    40 years, and this outdated statute needs to be modernized.
        The Business Activity Tax Simplification Act of 2008 both
    modernizes and provides clarity to an outdated and ambiguous
    tax environment.
        First, the legislation updates the protections of P. L. 86-
    272.
        This legislation reflects the changing nature of our
    economy by expanding the scope of protections of that law from
    just tangible personal property to include intangible property
    and services.
        In addition, our legislation sets forth clear, specific
    standards to govern when businesses should be obligated to pay
    business activity taxes to a State.
        Specifically, the legislation establishes a physical
    presence test such that an out-of-state company must have a
    physical presence in a State before the State can impose
    corporate net income taxes and other types of business activity
    taxes.
        The clarity that the Business Activity Tax Simplification
    Act will bring with insure fairness, minimize litigation, and
    create the kind of legally certain and stable business climate
    that encourages businesses to make investments, expand
    interstate commerce, grow the economy, and create new jobs.
        At the same time, this legislation will protect the ability
    of the States to ensure that they are fairly compensated when
    they provide services to businesses that do have a physical
    presence in the State.
        H.R. 5267 has been amended from what the Judiciary
    Committee reported out by voice vote last Congress.
        Specifically, the legislation has been amended to address
    some of the concerns expressed by the States.
        For example, the time period during this an individual or
    business could be present in a State without constituting a
    substantial physical presence has been reduced from 21 days to
    14 days.
        I will end my testimony by mentioning that this legislation
    has strong bipartisan support as noted by my colleague and
    friend, Congressman Boucher, from numerous Members of the House
    Judiciary Committee.
        And I would strongly urge the Chairman of the Subcommittee
    and Chairman Conyers to move forward with the markup of this
    legislation in the near future.
        And I thank you again for allowing me to participate today.
        [The prepared statement of Mr. Goodlatte follows:]

    Prepared Statement of the Honorable Bob Goodlatte, a Representative in
                      Congress from the State of Virginia

        Madam Chairman and Ranking Member Cannon, thank you for inviting me
    to testify this afternoon about the Business Activity Tax
    Simplification Act.
        Many states and some local governments levy corporate income,
    franchise and other taxes on out-of-state companies that conduct
    business activities within their jurisdictions. While providing revenue
    for states, these taxes also serve to pay for the privilege of doing
    business in a state.
        However, with the growth of the Internet, companies are
    increasingly able to conduct transactions without the constraint of
    geopolitical boundaries. The growth of the high tech industry and
    interstate business-to-business and business-to-consumer transactions
    raise questions over where multi-state companies should be required to
    pay corporate income and other business activity taxes.
        Over the past several years, a growing number of jurisdictions have
    sought to collect business activity taxes from businesses located in
    other states, even though those businesses receive no appreciable
    benefits from the taxing jurisdiction and even though the Supreme Court
    has ruled that the Constitution prohibits a state from imposing taxes
    on businesses that lack substantial connections to the state. This has
    led to unfairness and uncertainty, generated contentious, widespread
    litigation, and hindered business expansion, as businesses shy away
    from expanding their presence in other states for fear of exposure to
    unfair tax burdens. I understand that some of our witnesses on the next
    panel will detail the specific examples of abuses that are occurring
    under the current ambiguous legal environment.
        Previous actions by the Supreme Court and Congress have laid the
    groundwork for a clear, concise and modern ``bright line'' rule in this
    area. In the landmark case of Quill Corp. v. North Dakota, the Supreme
    Court declared that a state cannot impose a tax on an out-of-state
    business unless that business has a Asubstantial nexus@ with the taxing
    state. However, the Court did not define what constituted a
    ``substantial nexus'' for purposes of imposing business activity taxes.
        In addition, over forty years ago, Congress passed legislation to
    prohibit jurisdictions from taxing the income of out-of-state
    corporations whose in-state presence was nominal. Public Law 86-272 set
    clear, uniform standards for when states could and could not impose
    such taxes on out-of-state businesses when the businesses' activities
    involved the solicitation of orders for sales. However, like the
    economy of its time, the scope of Public Law 86-272 was limited to
    tangible personal property. Our nation's economy has changed
    dramatically over the past forty years, and this outdated statute needs
    to be modernized.
        The Business Activity Tax Simplification Act of 2008 both
    modernizes and provides clarity to an outdated and ambiguous tax
    environment. First, the legislation updates the protections in P.L. 86-
    272. This legislation reflects the changing nature of our economy by
    expanding the scope of the protections in P.L. 86-272 from just
    tangible personal property to include intangible property and services.
        In addition, our legislation sets forth clear, specific standards
    to govern when businesses should be obliged to pay business activity
    taxes to a state. Specifically, the legislation establishes a
    ``physical presence'' test such that an out-of-state company must have
    a physical presence in a state before the state can impose corporate
    net income taxes and other types of business activity taxes.
        The clarity that the Business Activity Tax Simplification Act will
    bring will ensure fairness, minimize litigation, and create the kind of
    legally certain and stable business climate that encourages businesses
    to make investments, expand interstate commerce, grow the economy and
    create new jobs. At the same time, this legislation will protect the
    ability of states to ensure that they are fairly compensated when they
    provide services to businesses that do have a physical presence in the
    state.
        H.R. 5267 has been amended from what the Judiciary Committee
    reported out by voice vote last Congress. Specifically, the legislation
    has been amended to address some of the concerns expressed by the
    States. For example, the time period during which an individual or
    business could be present in a State without constituting a substantial
    physical presence has been reduced from 21 days to 14 days.
        I will end my testimony by mentioning that this legislation has
    strong bipartisan support from numerous Members of the House Judiciary
    Committee. I would strongly urge the Chairman of the Subcommittee and
    Chairman Conyers to move forward with a markup of this legislation in
    the near future.

        Ms. Sanchez. We thank you for your testimony, Mr.
    Goodlatte.
        At this time, it is traditional to begin a round of
    questioning. I don't have any questions for the first panel.
        I am going to encourage my colleagues not to ask too many
    questions of the first panel knowing that your schedules,
    probably, are just as busy as ours.
        But if anybody is interested in asking brief questions? No?
    Nobody? Nope.
        The gentlewoman from California, Ms. Zoe Lofgren, is
    recognized.
        Ms. Lofgren. Not a question, but just kudos to our
    colleagues on the Committee for the leadership they have shown
    on this, not just this year, but in past years.
        I really appreciate and am proud to be a co-sponsor.
        Thank you.
        Ms. Sanchez. Anybody else?
        Okay. Gentlemen, that is it. We thank you for your
    testimony, and you are excused to run off to the many other
    demands on your time I am sure that you have.
        Mr. Boucher. Thank you, Madam Chairwoman.
        Ms. Sanchez. At this time, I would invite the second panel
    of witnesses to please approach the table.
        It is now my pleasure to introduce our second panel of
    witnesses for today's hearing.
        Our first witness is Mark Ducharme. And I apologize; I
    mispronounced your name initially.
        Mr. Ducharme is the vice president and chief financial
    officer of Monterey Boats, a Gainesville, Florida company
    founded in 1985.
        Prior to his employment at Monterey Boats, he served at
    James Moore and Company from 1995 to 1999, and at Arthur
    Anderson, LLP from 1989 to 1995.
        Mr. Ducharme is a member of the American Institute of
    Certified Public Accountants, the Florida Institute of
    Certified Public Accountants, and the board of directors of Big
    Brothers-Big Sisters of Mid-Florida.
        We want to welcome you to today's panel.
        Our second witness is Bruce Johnson, commissioner for the
    Utah State Tax Commission.
        Commissioner Johnson was appointed by Utah Governor Leavitt
    in 1998.
        Prior to his appointment, he was a partner at the law firm
    of Holme, Roberts, and Owen, LLP, where he litigated State and
    local tax disputes and advised clients on State and local tax
    issues, tax exemption issues, and issues relating to tax-exempt
    municipal financing.
        Commissioner Johnson also was a trial attorney for the tax
    division of the U.S. Department of Justice.
        Commissioner Johnson serves on the executive committee of
    the Streamlined Sales Tax Governing Board and is a member of
    the Utah Tax Review Commission, and a board member of the
    National Tax Association.
        He is a recent past chair of the American Bar Association
    Tax Section Committee on State and Local Taxes.
        We want to welcome you to our panel, Mr. Johnson.
        Our third witness is Michael Petricone.
        Mr. Petricone is the senior vice president of governmental
    affairs for the Consumer Electronics Association. He is
    responsible for representing the consumer electronics
    industry's position before Congress and the FCC on critical
    issues such as digital television, broadband, privacy, and home
    recording rights.
        Mr. Petricone is a frequent speaker on policy issues
    impacting the consumer electronics industry.
        And in 2003, he was featured by ``Dealer Scope'' magazine
    as one of the technology industry's top 40 under 40.
        Welcome to you, Mr. Petricone.
        Our final witness is David Quam, who we recognize. He has
    been before this Subcommittee many times.
        He is the director of the Office of Federal Relations for
    the National Governor's Association.
        Mr. Quam manages the NGA's legal and advocacy efforts,
    working closely with governors, Washington, DC representatives,
    and NGA's standing committees to advance the associations
    legislative priorities.
        Prior to working at NGA, Mr. Quam served as director of
    international affairs and general counsel of the International
    Anti-Counterfeiting Coalition, Incorporated.
        He was also an associate of the law firm of Powell,
    Goldstein, Frazer, and Murphy, LLP.
        Additionally, Mr. Quam was counsel on the U.S. Senate
    Subcommittee on the Constitution, Federalism, and Property
    Rights for the Committee on the Judiciary.
        It is good to have you back again with us, Mr. Quam.
        The lighting system, I would explain for this panel because
    I didn't for the first.
        When you begin your oral testimony, you will see a green
    light. That green light tells you you have 5 minutes to speak.
        When you have 1 minute remaining, the light will turn from
    green to yellow. That warns you that you have 1 minute left.
        And, of course, when your time expires, you will see a red
    light.
        If you are caught mid-sentence or mid-thought when the
    light turns red and your time expires, we will allow you to
    finish that thought or sentence before we move on.
        So with that, I also will tell the witnesses that once you
    have given us your oral testimony, Members will be allowed to
    ask question subject to the 5-minute limit.
        So with that, I am going to ask Mr. Ducharme to please
    proceed with his testimony.

     TESTIMONY OF MARK DUCHARME, VICE PRESIDENT AND CFO, MONTEREY
                          BOATS, WILLISTON, FL

        Mr. Ducharme. Thank you for the opportunity to address the
    Subcommittee concerning the Business Activity Tax
    Simplification Act.
        Monterey Boats is a small fiberglass boat manufacturer
    located in Williston, Florida.
        We build boats 18 to 40 feet. We have approximately 550
    employees, and produce approximately 2500 units every year.
        In understanding and discussing our position on State
    taxing authority, our obligation to pay appropriately mandated
    taxes are not in question.
        However, our ability to compete in our industry requires us
    to pass along these costs in the pricing of our product.
        When the taxing arm of each State does not consistently
    apply the law or provide clear guidance on activities requiring
    registration as an out-of-state corporation and potential tax
    obligation, we are at a distinct disadvantage not only with the
    domestic manufacturers but foreign manufacturers as well.
        Our first experience with State nexus in Michigan. The
    State sent us a detailed questionnaire inquiring about our
    activities within the State.
        Being unfamiliar with the nexus standards and naivete
    regarding the State's agenda, we inquired to other boat
    manufacturers their experience with States assessing income and
    sales tax on out-of-state corporations.
        Some manufacturers had not received any contact from
    States. Others had similar experiences that we were having. And
    still others received inquiries from States we had no contact
    with.
        Since we do not have property or payroll and sales occur
    outside the State, we deemed our exposure to Michigan assessing
    tax nonexistent.
        However, in further discussions with Michigan state agents,
    very few follow-up questions were asked regarding our responses
    to the questionnaire as if the question on whether or not we
    owed Michigan's single business tax was a foregone conclusion
    and the questionnaire with a formal process having little
    significance in determining whether or not we owed any tax.
        We subsequently determined agents from the State were
    contacting dealers domiciled in the State posing as interested
    customers to inquire regarding how we delivered the product.
        Did we have sales representatives in the State?
        How often did they visit the dealer?
        Do we assist in unloading the product?
        And how was the warranty process handled?
        Based on the dealer's responses, it was deemed by the State
    we had an obligation to register, pay tax, and the burden was
    on us to disprove comments made by Monterey Boats' dealers
    regardless of whether or not the dealer could have made
    incorrect responses, didn't understand the basis of the
    questions, or confused us with one of the their other product
    lines.
        Our next experience occurred with the State of New Jersey
    and is nothing short of extortion.
        We received a phone call on October 6, 2004 from someone
    purporting to be an agent with the New Jersey Division of
    Taxation. The agent indicated he was in possession of our truck
    with a load of boats destined for delivery in the State.
        The agent subsequently indicated the truck was to be
    impounded along with the boats unless we immediately remitted
    $27,500.
        The investigative agent claimed nexus arose because we
    deliver product into the State on trucks owned by Monterey.
        We also determined the $27,500 figure was determined based
    on a fuel formula having no basis or relation to property,
    payroll, or sales.
        After refusing to remit any funds for tax based on a fuel
    formula, we retained an attorney to intervene on our behalf,
    and our attorney negotiated the release of the truck and the
    boats.
        However, on October 7, we received a warrant of execution
    jeopardy assessment demanding payment for $176,000, again,
    based on some explainable fuel formula.
        In addition, the State placed a lien by levy on fund due to
    us from New Jersey dealers finance company.
        And on December 21, 2004, we filed a petition on protest
    and request for refund with the conference and appeals branch
    with the State.
        We received a notification letter and a list of questions
    the State wanted us to provide prior to the hearing.
        None of the questions related to use of or delivery of the
    boats on Monterey owned or leased trucks appearing as if of
    reason for New Jersey having authority to impose tax for
    delivery on product on Monterey trucks no longer applied.
        In October 2006, we met with the conference and appeals
    branch to resolve the issue and clarify our responsibility with
    the State. Subsequent to that hearing, we submitted a proposed
    resolution, and to date, no response has been received.
        Our sales are down approximately 13 percent year-to-date.
    Our full-time employee count is down approximately 15 percent.
        We are experiencing an unprecedented amount of pricing
    pressure in the boating industry requiring us to offer higher
    and more incentives.
        In the short term, we consider rebates and incentives in
    investment in establishing or increasing our market share.
        However, in the long term, the continued pressure on
    profitability has consequences: profound layoffs, decreased
    competition, and eventually going out of business.
        Monterey is the largest employer in the surrounding
    geographic area and the loss of jobs has a profound and
    rippling affect through the local economy.
        In order to establish consistent application of doing
    business, we need clear guidance provided by the Business
    Activity Tax Simplification Act of 2008.
        Thank you.
        [The prepared statement of Mr. Ducharme follows:]

                      Prepared Statement of Mark Ducharme

        Ms. Sanchez. Thank you, Mr. Ducharme. I appreciate your
    testimony.
        At this time, I will invite Mr. Johnson to give his oral
    testimony.

             TESTIMONY OF R. BRUCE JOHNSON, COMMISSIONER,
             UTAH STATE TAX COMMISSION, SALT LAKE CITY, UT

        Mr. Johnson. Thank you, Madam Chairwoman and Members of the
    Subcommittee.
        I appreciate this opportunity to testify today.
        I am Bruce Johnson, one of the commissioners of the Utah
    State Tax Commission.
        I am here today testifying on behalf of the Federation of
    Tax Administrators and the Multi-State Tax Commission.
        The FTA is an association of tax administrative agencies in
    all of the 50 States, the District of Columbia, Puerto Rico,
    and New York City.
        The Multi-State Tax Commission is an organization of State
    governments that works with taxpayers to administer, equitably
    and efficiently, tax laws that apply to multi-state and multi-
    national enterprises.
        FTA and MTC both strongly oppose this legislation because
    the bill would result in significant revenue losses for the
    States. It would reverse years of judicial precidents under the
    basis for State taxation. And it would create tax planning
    opportunities for multi-state, large multi-state enterprises
    that would not be available to locally-owned small businesses.
        In addition, we believe that there has been a failure to
    show an adequate need for this legislation.
        The Congressional Budget Office estimated in 2005 that
    predecessors of the current bill would result in a $3 billion
    annual revenue loss, the largest unfunded mandate CBO had ever
    measured.
        The National Governors' Association estimated an annual
    range of lost State revenues from $4.7 billion to $8 billion
    with a single best estimate of $6.6 billion.
        We are currently in the process of updating those
    estimates, but it appears that the losses under this bill will
    be the same order of magnitude as they were under the prior
    bill.
        The bill, as proposed, has two major components. First, it
    expands Public Law 86-272.
        Public Law 86-272 already allows a corporation to have a
    full-time sales force in a State, full-time, driving company
    cars on State roads. As long as the activities of that sales
    force will limited to the solicitation of sales of tangible
    personal property and ancillary activities that company is
    exempt from corporate income tax.
        That is unfortunate enough. That is simply bad policy.
        But this bill--at least 86-272--is limited to corporate
    income taxes and sales of tangible personal property.
        This bill would allow the same full-time sales force to be
    in a State soliciting sales of services and sales of intangible
    property. It would also allow those representatives to be in
    the State full time if they were purchasing agents purchasing
    sales or services on behalf of a corporation.
        So not only do you have sales people, you have got
    purchasing agents now who can be in a State full time and be
    exempt from taxation.
        Second, the bill would prohibit States from taxing a myriad
    of other activities if the corporation did not have a bricks
    and mortar facility in the State or employees in the State for
    more than 15 days.
        But there is also an exception if they were there for
    transient or limited purposes where you can be in the State for
    more than 15 days if you are there for a limited purpose.
        What is a Federal court going to do with a limited purpose?
    If I am an architect from out of State and I am in a State for
    a year supervising the construction of a shopping center, am I
    there for a limited purpose? Arguably, I am.
        If that is my only presence in the State, is it transient?
    Arguably, it is.
        This bill will not provide the kind of certainty that its
    proponents hope for.
        It also provides all sorts of tax planning. Let me give you
    two examples.
        A Utah bank has 10,000 Visa card holders. It pays income
    tax on the fees it receives from merchants and on the interest.
        An out-of-state bank blankets Utah with solicitation for
    card holders, signs up the same 10,000 people to conduct the
    same transactions with Utah retailers, pays the same interest,
    that bank is exempt from Utah income tax. They are competing
    head to head. That doesn't make any sense in today's economy.
        Second, two toy stores, both in South Carolina, next to
    each other. They both have the same sales. They both have the
    same profit margin. One has an intangible holding company and
    pays 3 percent of its gross sales as a royalty to a Delaware
    holding company, obliterating its sales tax or its income tax
    obligation.
        This is simply bad tax policy. It creates an unlevel
    playing field between interstate and local businesses, and we
    urge you to oppose this legislation.
        Thank you.
        [The prepared statement of Mr. Johnson follows:]

                     Prepared Statement of R. Bruce Johnson

        Ms. Sanchez. Thank you for your testimony, Mr. Johnson.
        At this time, I would invite Mr. Petricone to provide his
    oral testimony.

      TESTIMONY OF MICHAEL PETRICONE, VICE PRESIDENT, TECHNOLOGY
        POLICY, CONSUMER ELECTRONICS ASSOCIATION, ARLINGTON, VA

        Mr. Petricone. Good afternoon, Madam Chairwoman and Members
    of the Subcommittee.
        The Consumer Electronics Association [Inaudible] to create
    jobs, drive the economy, and--I don't have to tell you in these
    tough economic times that [Inaudible].
        There is one issue, however, that this Subcommittee can
    immediately address: The growing number of States using
    economic nexus theories to unfairly tax companies that have no
    physical presence within the State.
        No taxation without representation is America's first
    governing principle.
        Having established our nation under that basis, our
    founders went further. They created a single national economy
    and imposed constitutional safeguards to ensure that States
    cannot act to impede interstate commerce.
        Unfortunately, the system our founders put in place is now
    eroding.
        The number of States with a statute or regulation
    establishing economic nexus without a physical presence has now
    grown to more than a dozen.
        The problems caused by this growing patchwork of taxation
    are obvious and they fall disproportionately on our small
    business members.
        As you know, small businesses run close to the bone. To
    [Inaudible] beneath reasonable taxation in a settled,
    predictable business climate, but increasingly, they face
    significant costs [Inaudible] their State tax liabilities.
        They must meet multiple filing requirements, keep multiple
    records, and deal with multiple sets of regulators.
        It is becoming difficult for them to make any reasonable
    estimate of their projected tax burden. You can imagine the
    challenges of long-term business planning in such an
    environment.
        Of course, small firms also have fewer resources to
    challenge questionable assessments in far away States. As a
    practical matter, when faced with these levies, they have
    little choice but to bite the bullet and write the check.
        As a technology association, we are especially concerned
    with the burdens the situation places on electronic commerce.
        At the very moment, the Internet grants every business
    access to a national marketplace, a crazy quilt of local tax
    obligations, throws a roadblock across the electronic highway.
        Businesses will avoid sales in the various States, and
    consumers, especially those in the remote areas, will be unable
    to go online and get the goods they need.
        This situation will not resolve itself. In fact, left
    alone, it will get worse.
        Out-of-state businesses present at the timing targets to
    legislators seeking to raise revenue. Naturally, States have
    every political incentive to exploit their tax burdens as
    aggressively as possible.
        Meanwhile, States are making conflicting decisions and the
    Supreme Court has declined to address this issue. Specifically,
    the Supreme Court recently refused to hear two cases
    challenging the constitutionality of the economic nexus
    approach. Naturally, States see this as a green light to press
    forward with more economic nexus legislation.
        Pursuant to your authority under the commerce clause, it is
    time for you to act. There is ample precedent here.
        A few examples: You have moved to prevent multiple States
    taxes on electronic commerce. You have ensured that States
    cannot impose apply-over taxes on airlines.
        And you have restricted taxation of mobile communication
    services to the State where the service is primarily used.
        Specifically, we now urge you to support H.R. 5267, the
    Business Activity Tax Simplification Act of 2008. The bill
    provides that, pursuant to the commerce clause, a State may not
    impose business activity taxes on businesses that have no
    physical presence in the State.
        And the physical presence rule clearly clarifies the State
    taxation landscape. It is easy to understand. It is easy to
    enforce. Its bright-line standard ensures that small businesses
    know with certainty when and where they will be taxed.
        For a business owner, this means fewer resources spent on
    tax compliance and litigation and more resources invested in
    building their business.
        Such an approach would also ensure compliance with our
    international treaty obligations. In every tax treaty to which
    the U.S. is a party, the universal climate for imposing income
    taxes on non-residents is physical presence in the taxing
    jurisdiction.
        This is a fair and reasonable solution. Contrary to
    opponents' claims, it will not limit a State's ability to tax
    shelters or allow businesses to restructure their activities to
    avoid paying legitimate taxes. That is not the intention here.
    Our members are good corporate citizens.
        We do not object to paying our fair share of taxes. We
    simply believe that States that provide meaningful benefits to
    the business, like water, roads, fire, police protection,
    should properly receive the tax revenue rather than a distant
    State that provides no benefits.
        Members of the Committee, the constitution is clear. The
    right to regulate beyond individual States' borders lies, not
    with the States but with Congress. A bright-line physical
    presence rule eliminates ambiguity, stimulates investment, and
    promotes interstate commerce. It is good for large and small
    businesses, and it is good for the economy.
        We urge Congress to support H.R. 5267, the Business
    Activity Tax Simplification Act of 2008.
        I commend you for holding this hearing, and I look forward
    to answering your questions.
        [The prepared statement of Mr. Petricone follows:]

                    Prepared Statement of Michael Petricone

        Ms. Sanchez. Thank you, Mr. Petricone.
        At this time, I would like invite Mr. Quam to give his
    testimony.

        TESTIMONY OF DAVID C. QUAM, DIRECTOR, OFFICE OF FEDERAL
       RELATIONS, NATIONAL GOVERNORS ASSOCIATION, WASHINGTON, DC

        Mr. Quam. Chairwoman Sanchez, Mr. Jordan, Members of the
    Subcommittee, it is a privilege to go back here before you
    again on behalf of the National Governors' Association, this
    time, expressing governors' strong opposition to H.R. 5267, the
    ``Business Activity Tax Simplification Act of 2008.''
        It is not often that governors can come together on a
    consensus basis behind a policy and then State that policy
    clearly. It just so happens that in this particular area, we
    have a very precise process statement from the governors.
        ``The nation's governors oppose any further legislative
    restriction on the ability of States to determine their own
    policy on business activity or corporate profits taxes. This is
    an issue of State sovereignty. The U.S. Constitution adequately
    protects the interests of both States and business.''
        ``H.R. 5267, like its predecessors that we have discussed
    before, represents an unwarranted Federal intrusion into State
    affairs that would allow companies to avoid and evade State
    business activity taxes, increase the tax burden on small
    businesses and individuals, alter established constitutional
    standards for State taxation, and at the end of the day, cost
    States billions of dollars.''
        Rather than going through my written testimony, I wanted to
    focus on something because I think the witnesses covered it.
    There is a distinct question of philosophy here. Everyone talks
    about--and Congressman Goodlatte and Boucher, who I respect a
    lot--talked about modernizing a 49-year-old law.
        The question is should we be modernizing the 49-year-old
    law. That is a difference economy and a different time.
        It was a law put in place when business could only be done
    by a handshake, by traveling into a State. We are in an
    Internet-based economy, and we have experienced several debates
    with this Committee regarding what an Internet-based and
    communications-based economy means.
        In today's economy, you can do business in another State
    without ever setting foot there. From a State's perspective,
    that means that out-of-state companies can come in, compete
    with your mom-and-pop stores and compete with your State
    businesses but not share the tax burden of the roads, the
    education, which I would argue that every company who is doing
    business in the State benefits from the services that are
    provided by that State.
        I think, philosophically, States have come together with
    regard to simplification of big sales taxes. The Streamlined
    Sales Tax and Use Agreement is an example where States have
    come together to address the complex issue and try to solve a
    national problem in working with business.
        At the end of the day, we are trying to mostly form a
    physical presence standard for sales taxes, which is what Quill
    said, into more of an economic presence standard where remote
    vendors can collect and be asked to collect those sales taxes.
        To comment on the business activity side, say, we are going
    to reverse where we current stand and move backwards 49 years,
    does not make a lot of sense from a tax policy standpoint.
        And certainly, when you are talking about congressional
    interference with State tax systems, Congress has to be very,
    very careful about when it crosses that line.
        I would also like to say that this is a bottom-line issue.
    If I was representing a company right now, I also would be on
    this bill. I would support it because it is a $6 billion tax
    break for business. It is $6 billion that will go to almost any
    business who is not physically present.
        However, it is also a $6 billion tax break that can go to
    companies who are physically present.
        Under this bill, you can do the type of tax planning where
    you can have two toy stores next to each other; one who has the
    means to hire the tax counselors to actually exploit the
    loopholes in this bill. And all of a sudden, you have the same
    stores physically present in the State, one paying business
    activity tax and one not. That does not seem to be a good
    standard for Congress to be setting for a modern economy.
        Lastly, there is a lot of talk about States entering into
    discussions.
        I would agree that clarifying the laws, making it clear,
    moving forward, are discussions worth having, but they must be
    balanced with State interest of sovereignty and the revenue
    interest of States.
        NGA is repeatedly on this issue over the past years, and I
    think Mr. Delahunt made this point at the last hearing. Please
    get together and have a discussion of how we can move forward.
        Unfortunately, in that time, my phone rang once. And that
    call was to tell me that this bill was being dropped.
        The governors would welcome a discussion, but I think we
    have to talk about what is the question that has to be--what is
    the question and what is the problem, and then what can we do
    in a balanced fashion that makes sense, respecting State
    sovereignty and the revenue concerns.
        Thank you, Chairwoman.
        [The prepared statement of Mr. Quam follows:]

                      Prepared Statement of David C. Quam

        Chairwoman Sanchez, Ranking Member Cannon and members of the
    Subcommittee, I am pleased to be here on behalf of the National
    Governors Association (NGA) to communicate governors' strong opposition
    to H.R. 5267, the ``Business Activity Tax Simplification Act of 2008.''

    Governors oppose H.R. 5267:

        Governors' long-standing policy regarding federal interference with
    state business activity taxes is clear and unambiguous. NGA Policy
    reads:

            ``The nation's governors oppose any further legislative
            restriction on the ability of states to determine their own
            policy on business activity or corporate profits taxes. This is
            an issue of state sovereignty. The U.S. Constitution adequately
            protects the interests of both states and business.'' (NGA
            Policy Position, EC-9)

        H.R. 5267, the ``Business Activity Tax Simplification Act of
    2008,'' like its predecessors in other Congresses, represents an
    unwarranted federal intrusion into state affairs that would allow
    companies to avoid and evade state business activity taxes (BAT);
    increase the tax burden on small businesses and individuals; alter
    established constitutional standards for state taxation; and cost
    states billions in existing revenue. While governors welcome the
    opportunity to discuss issues related to business activity taxes, they
    urge Congress to oppose measures such as H.R. 5267 that would assist
    large corporations to the detriment of other taxpayers and states.

    1H.R. 5267 violates core principles of federalism:

        Governors oppose H.R. 5267 because it represents an unnecessary
    intrusion into the states' authority to govern. U.S. courts have long
    recognized the authority of a state to structure its own tax system as
    a core element of state sovereignty. H.R. 5267 would interfere with
    this basic principle by altering the constitutional standard that
    governs when states may tax companies conducting business within their
    borders. Specifically, the bill would mandate the use of a physical
    presence standard for determining whether an entity can be taxed. This
    differs from economic presence, such as the ``doing business'' or
    ``earning income'' standards used by most states. As discussed below,
    this change would shrink state tax bases by relieving out-of-state
    businesses of BAT liability while allowing larger in-state companies to
    circumvent tax laws by legalizing questionable tax avoidance schemes.
    These outcomes would effectively constitute a federal corporate tax cut
    using state tax dollars--a decision that, fundamentally, should be left
    to state elected officials.

    1H.R. 5267 would encourage tax evasion and avoidance:

        H.R. 5267 promotes avoidance of state taxation. At a time when the
    federal government is closing loopholes in the federal tax code, H.R.
    5267 would subvert state tax systems by creating opportunities for
    companies to structure corporate affiliates and transactions to avoid
    paying state taxes.
        The bill's physical presence standard would significantly raise the
    threshold for business income taxation in most states and, according to
    a January 20, 2006 report by the Congressional Research Service (CRS)
    on similar legislation, lead to more ``nowhere income.'' In fact, CRS
    noted that legislative exceptions to the supposed physical presence
    standard, including its massive expansion of P.L. 86-272 to services,
    ``would . . . expand the opportunities for tax planning and thus tax
    avoidance and possible evasion.''
        If H.R. 5267 provides the opportunity for planning, corporations
    will use it to avoid taxation. For example, a recent Wall Street
    Journal article demonstrated the extent to which corporations already
    work to avoid state business taxation. (``Inside Wal-Mart's Bid to
    Slash State Taxes,'' Wall Street Journal, Oct. 23, 2007.) The article
    details the extensive tax avoidance strategies of Wal-Mart as it sought
    to reduce its state tax liability through a series of sophisticated
    strategies, some of which states later identified as abusive and
    illegal tax shelters. A common thread among the strategies was the
    formation of entities in jurisdictions that do not tax certain
    activity, followed by a shift of income to the entity to avoid
    taxation. If enacted, the physical presence nexus standard of H.R. 5267
    would federally codify such tax practices and grant corporations with
    the means to restructure their businesses with a federal permission
    slip to aggressively avoid state taxation.

    H.R. 5267 would harm locally-owned and small businesses:

        H.R. 5267 would favor large, multi-state corporations to the
    detriment of small businesses and individual taxpayers. By raising the
    jurisdictional standard for taxation, H.R. 5267 would effectively limit
    a state's business activity tax base to in-state companies. Out-of-
    state vendors could therefore compete for customers against in-state
    businesses with the advantage of inequitable tax responsibilities.
        At the same time, larger in-state companies with the size and means
    to hire professionals specializing in tax avoidance could minimize or
    eliminate their state business tax liability even though they are
    present in the state. This ability to be physically present yet avoid
    state taxation places a disproportionate tax burden on smaller, in-
    state businesses and individual taxpayers. Companies willing to compete
    for customers and earn revenue in a state should share the
    responsibility of paying for state services that benefit all
    businesses.

    H.R. 5267 would alter established constitutional standards:

        H.R. 5267 would alter the existing constitutional standard for
    taxation of business activity. The U.S. Supreme Court has never
    required a physical presence standard for imposing business activity
    taxes. In fact, since the time of this Subcommittee's last hearing on
    this topic in 2005, state courts, and through its denial of certiorari,
    the U.S. Supreme Court, have clearly established economic presence, not
    physical presence, as the appropriate standard for determining if a
    company has sufficient contacts to impose a business activity tax. (A&F
    Trademark, Inc., et al. v. Tolson, 605 S.E. 2d 187 (N.C. Ct. App.
    2004), review denied (N.C., 2005), cert denied, 126 S. Ct. 353 (2005);
    Kmart Properties, Inc. v. Taxation and Revenue Dept., No. 21,140 (N.M.
    Ct. App. 2001), certx quashed (N.M. 12/29/05); Lanco, Inc. v. Director,
    Division of Taxation, 908 A.2d 176 (N.J. 2006), cert. denied, 127 S.Ct.
    2974 (U.S., 6/18/07); Geoffrey, Inc. v. Oklahoma Tax Commission, 132
    P.3d 632 (Okla. Ct. Civ. App., 12/23/05), review denied (Okla., 3/20/
    06); Commissioner v. MBNA America Bank, N.A., 640 S.E.2d 226 (W.V.
    2006), cert. denied, FIA Card Services, N.A. v. Tax Commissioner of
    West Virginia, 127 S.Ct. 2997 (U.S., 6/18/07)). H.R. 5267 would disrupt
    this well-established constitutional standard and call into question
    state business activity tax systems in every state.

    H.R. 5267 would undermine state revenues:

        H.R. 5267 represents a huge unfunded mandate that will result in
    the loss of billions of state dollars. A survey released by the
    National Governors Association found that a substantially similar House
    bill, H.R. 1956, would cost states more than $6.6 billion annually.
    (``Impact of H.R. 1956, Business Activity Tax Simplification Act of
    2005, On States,'' National Governors Association, September 26, 2005.)
    Preliminary cost estimates for H.R. 5267 yield similar results, with
    first-year loss estimates ranging from $20 million in a state like
    Idaho to over $366 million for New Jersey. State losses also will grow
    as companies restructure to take advantage of H.R. 5267's loopholes.
    California estimates that if enacted, H.R. 5267 would cost the state
    $135 million in 2011 then grow to more than $614 million just two years
    later.
        This shift in revenue, while beneficial to business, is
    particularly harmful to states because unlike the federal government,
    states are required to balance their budgets. Consequently, when
    federal action causes states to lose revenues, states must act to
    replace lost funds by either increasing taxes or cutting programs. The
    economic effects of such actions are pro-cyclical in that they make
    economic downturns worse. NGA already predicts that 21 states are
    likely to face $34 billion in budget shortfalls for fiscal year 2009.
    Federal legislation that would reduce corporate state taxes by $6
    billion annually would only further exacerbate the pro-cyclical
    pressures on states and thereby prolong the economic downturn and delay
    recovery.

    Conclusion:

        States have demonstrated that they are willing to address state tax
    issues on a national basis. Through projects like the Streamlined Sales
    and Use Tax Agreement, states have come together with the business
    community to fashion workable solutions that address both private and
    public sector interests.
        Unfortunately, in the context of business activity taxes,
    proponents of bills like H.R. 5267 have shown little willingness to
    work with states to either properly define the problem or discuss
    solutions that balance the goals of certainty and consistency with
    state authority and revenue requirements. As a result, NGA will
    continue to oppose legislation like H.R. 5267 and call upon Congress to
    reject legislation that interferes with state business activity tax
    systems.

        Ms. Sanchez. Thank you, Mr. Quam.
        We will now begin our round of questioning, and I will
    begin by recognizing myself first for 5 minutes of questions.
        Mr. Johnson, businesses contend that it is understandable
    for them to pay taxes when they receive government benefits in
    return, such as police and fire protection.
        How do you respond to supporters of a physical presence
    standard who contend that businesses receive no benefit from
    government under the economic presence standard?
        Mr. Johnson. Well, I would respond in two ways, Madam
    Chair.
        First, I would say that--take the example of the bank, the
    out-of-state bank.
        It is using the same financial infrastructure that a State
    bank is using. It is using the courts to enforce its
    contractual obligations.
        It is benefitting from the working force and exploiting the
    market in the State the same way that a local bank is.
        It doesn't have to pay property taxes because it doesn't
    have property there, but it is certainly exploiting the market
    and the civilized society that is created there.
        So I think that bank does benefit from the courts, the
    infrastructure provided by the State.
        Secondly, look at the toy store example. You can have,
    under this bill, you can have an intangible holding company
    that essentially sucks the profit out of a bricks and mortar
    company and it won't have to pay any tax.
        Under 86-262, you can have those salesmen driving on State
    roads, being protected by the State police force, having
    company cars protected by the State police force and the fire
    department. They simply receive those benefits. They should pay
    a fair share.
        Ms. Sanchez. Thank you.
        Mr. Quam, I know you have been before this Subcommittee
    many times, but with respect to this particular issue, do you
    agree that there is a problem here? That there is a lack of a
    clear and uniform standard that has made it difficult for
    businesses to meet their filing obligations and to sort of plan
    prospectively?
        Mr. Quam. There are certainly different standards. But as
    we have talked many times, federalism is difficult.
        The sovereignty of States to establish their own revenue
    systems is a core of that sovereignty. And so that will
    engender certain complexities.
        Ms. Sanchez. But you don't think that, perhaps, we might be
    able to benefit from a little uniformity or a little more
    clarity?
        Mr. Quam. There can be benefits to uniformity. I think they
    really have to be measured against State sovereignty interests.
        Again, I think States may be willing to discuss, you know,
    what the particular problem is and see if there is a way to
    clarify. However, States still need the flexibility to control
    and manage their own State systems.
        Differences will always remain. There are some things that
    can be done. Unfortunately, under this bill, what you are
    really doing is gutting the entire system to solve what I think
    may be a much more pointed problem.
        Also, one thing that this bill does not do is establish a
    clear line. Physical presence sounds clear, but not when you
    incorporate all the exceptions that still remain in this bill.
        They might not be line for line like they were in previous
    measures, but they are still contained in here with some of the
    exceptions.
        So, unfortunately, we don't have a bright-line before us.
        Ms. Sanchez. That is a point well-taken.
        You indicate in your written statement that H.R. 5267 would
    increase the tax burden on small businesses and individuals,
    and I am interested in knowing why you believe that.
        Mr. Quam. The reason for that is, going back to my example
    of the two toy stores, the fact of the matter is, under
    physical presence standards, particularly the one in this bill,
    you can have a company that is physically presently that does
    not pay tax.
        Your small business who does not have the fleet of
    accountants and does not have the tax attorneys to do some of
    the planning necessary to take advantage of the loopholes in
    this bill is going to pay full freight.
        They are going to pay the State business activity tax, the
    property tax. They are going to pay their taxes as good
    corporate citizens.
        The company next to them that may be a large conglomerate
    or corporation that has the ability to do that can do the tax
    planning to avoid that State taxation, and now you have two
    stores running the same business. One has a lower tax burden
    than the other, yet both are physically present.
        That increases the burden on those who are there that can't
    do that tax planning because the tax burden still remains
    within that State.
        Ms. Sanchez. Mr. Petricone, I know that you stated that
    your members are good corporate citizens and that the purpose
    of this bill is not to evade taxes and I want to believe you.
        But I do also know that there are, occasionally, a few bad
    apples that will try to exploit certain advantages.
        I wanted to ask you specifically, earlier this year the New
    York State Bar Association recommended that Congress establish
    a clear nexus standard for a States' imposition of a business
    activity tax.
        And it suggested that the standard take into account
    economic presence rather than a pure physical presence test and
    include a reasonable de minimis threshold before imposing a tax
    on a business.
        Do you like anything at all about the Bar Association's
    recommendation? Or are you totally opposed and wholeheartedly
    just a supporter of the physical presence standard?
        Mr. Petricone. Well, Madam Chairwoman, there is many ways
    to get there. One thing that small businesses need that is very
    important to them is certainty.
        They want to know how they are being taxed, where they are
    being taxed, and who they are being taxed by.
        Again, you know, when you have minimal resources, the
    notion of complying with multiple taxing entities operating
    under multiple rules is--I mean, it may sound look a minimal
    thing, but it is extraordinarily burdensome to you and
    expensive.
        Ms. Sanchez. Wouldn't a small business that was subject to
    de minimis standards have some certainty?
        Mr. Petricone. Right? Well, the attraction of the physical
    presence rule for us is that that is far and away the simplest
    to understand and the simplest to administer.
        While I realize that there are other ways to get there, and
    that is good and that should be discussed, for us, it is the
    simplicity of the physical presence standard that is very
    attractive.
        Ms. Sanchez. You are a physical presence standard only guy?
        Mr. Petricone. That is what we believe to be the best
    solution, yes.
        Ms. Sanchez. Okay. Thank you.
        My time has expired. At this time, I would recognize our
    acting Ranking Member, Mr. Jordan, for 5 minutes of
    questioning.
        Mr. Jordan. Thank you, Madam Chair.
        Mr. Johnson, a couple of times, you have mentioned 86-272
    is clear that a company can have a sales force in a State
    driving on roads--to use your language--and not be subject to
    tangible personal property tax in that jurisdiction.
        You also said in your opening comments that you think
    businesses have failed to show that there is adequate need to
    update this 1959 law.
        How do you square what you just said with the example that
    Mr. Ducharme gave with his experience in the State of New
    Jersey and them seizing his property and stopping the boats
    from being delivered?
        How do you square those two?
        Mr. Johnson. Well, I guess I would respond to Mr. Jordan
    first.
        I would agree that there is a need for some clarity in this
    area.
        The Multi-State Tax Commission has promulgated a factor
    presence formula that would provide that most businesses don't
    have to pay any income tax in a State unless they have either
    more than $500,000 worth of sales, more than $50,000 worth of
    property, or more than $50,000 worth of payroll in the State.
        I think something like that should be adopted by the States
    uniformly. I think an important part of tax policy is
    certainty, and small businesses do need certainty.
        So to the extent that that problem exists, and it does
    exist, I think the States should work collectively to solve it.
    We would rather have the businesses come to us as States and
    solve that rather than have it imposed at the congressional
    level.
        Second, I would just say that New Jersey is not here. They
    provided a letter that describes their jeopardy assessment
    policy.
        Jeopardy assessments are common in the States. They are
    also used by the Federal Government.
        There is always, at the very least, a post-deprivation due
    process hearing that is required in case those powers are being
    exercised inappropriately.
        You know, without----
        Mr. Jordan. Okay.
        Mr. Ducharme, in your experience, you related the New
    Jersey story, are you seeing this more widespread? Are you
    seeing other States being aggressive?
        I mean, give me some of your experiences.
        Mr. Ducharme. Our personal experience in New Jersey has
    definitely been the most aggressive.
        The process that we have encountered with the other States
    that have contacted us has been a phone call questionnaire.
    Mind you, that really doesn't have any merit to whether or not
    they are going to assess tax on you, but it has been more of a
    formal phone call questionnaire return separation process as
    opposed to what we encountered in the State of New Jersey.
        Mr. Jordan. Sure.
        Any time any department of taxation is calling you, you
    certainly take notice, I would think.
        Mr. Ducharme. Yes.
        Mr. Jordan. I understand how that is.
        Maybe you and Mr. Petricone, give me your general thoughts
    on where you think it is headed. I mean, if we don't get some
    clarification, what--give me your thoughts of what you see in
    the not too distant future and how that impacts you.
        And I know you have talked about that some. I will come
    back to you, Mr. Petricone.
        Mr. Petricone. Right. Congressman Jordan, what worries me
    about this issue is, left to its own devices, there is an
    upward--effect.
        Mr. Jordan. Right.
        Mr. Petricone. You know, I mean, if somebody doing this to
    my company, than I am certainly going to do this to your
    company.
        You know, and you have 50 States, and you have got
    municipalities and--you know, so there are potentially dozens
    and dozens of jurisdictions where these may be enacted.
        Mr. Jordan. Right.
        Mr. Petricone. So we are afraid--right now, you can say it
    is only a dozen States, what is the big deal. But we are
    convinced that, left to its own devices, it is going to worse.
    I mean, the condition is there for it to get worse.
        I can also add----
        Mr. Jordan. You know, that is the nature of government.
        Mr. Petricone [continuing]. Right. And, of course, there is
    every political incentive to export your tax burden, sir.
        Even at the present time, there are a few issues;
    Congressman--gets many calls from our small business members
    saying, you know, this just happened to me, this is terrible,
    what can I do.
        And at present, there is not a lot I can tell them.
        Mr. Jordan. Go ahead. I have got one more question for Mr.
    Petricone, but go ahead.
        Mr. Ducharme. I think the discussions that we have had
    internally at Monterey have centered around, you know, what is
    the rationale for this process; how did it begin?
        And it all stems from, and it is our opinion that it is the
    constraints that State budgets are having that they are looking
    for additional revenue.
        This seems to be a short-term solution to a long-term
    issue.
        Monterey Boats, all activity occurs in the State of
    Florida.
        We have independent sales reps that are not employees of
    Monterey, so we don't benefit from any of the resources of the
    States that we deliver boats into.
        We pay income, sales, property, real property taxes in the
    State of Florida. We pay for permits and fuel taxes in the
    various States that we deliver to.
        At the end of the day, our activities within all these
    States that are imposing tax on us, we don't actually benefit
    from. The ultimate buyer, yes, they do; but we, as a
    corporation, do not.
        Ms. Sanchez. The time of gentleman has expired
        I just wanted to make sure the witnesses have your mics on
    when you are answering questions. For recording purposes, we
    need the mics on even though we can hear you.
        At this time, I would like to recognize the Chairman of the
    full Judiciary Committee who has joined us, Mr. Conyers, for 5
    minutes of questions.
        Chairman Conyers. Thank you very much, Chairwoman Sanchez.
        What a great afternoon here to have standing-room-only.
        Why is it that Subcommittee number five always seems to
    attract more attention than all the other great Subcommittees
    that exist on the Judiciary Committee?
        Ms. Sanchez. It is because of the Chairwoman, I think. That
    is the short answer, Mr. Conyers.
        Chairman Conyers. Well, the Chairwoman is correct herself.
        Look, when we started here in the 110th Congress, nobody
    wanted to go on Subcommittee number five. Now, I am still
    getting requests for people that ask me to enlarge number five,
    can they get on it for next year, and it goes on and on and on.
        More subpoenas and authorizations for subpoenas come out of
    this Subcommittee than any other--than all the other
    Subcommittees on the Judiciary Committee.
        Look, and here we are this afternoon, standing-room-only,
    offices on K Street, Pennsylvania Avenue, L Street, Georgetown,
    are left lane barren. And everybody is here.
        I look across the room, the only ones that aren't here are
    Members of Congress that have offices in those places that I
    just named.
        And so we know that something important and significant and
    serious is afoot here.
        Now, what to do?
        Well, let us have some fairness for the business community.
    Okay. But let us remember that the States are catching hell.
    Most of them are insolvent. And so what should we do?
        Well, it devolves upon this powerful Subcommittee under the
    distinguished leadership of the gentlewoman from California to
    urge that there be further negotiations after this splendid
    hearing this afternoon.
        We have got to start talking with some people. Here, we
    have wonderful divisions here. We heard our first two
    colleagues on the Committee. They are joined by Messrs Pence
    and Gallegly.
        And, of course, the distinguished gentlelady from
    California, Ms. Lofgren and former magistrate Hank Johnson.
        I mean, the only few people hanging out here uncommitted
    are the gentleman from Massachusetts and the acting, Ranking
    minority Member here and myself.
        And so we would like the results of this hearing to be the
    predicate for some other discussion in which we try to resolve
    what is the central dilemma.
        Sure, let us protect business. But tell me what I tell
    Governor Granholm when I go back to Detroit just what we did.
    We just relieved you of millions of dollars of taxes that would
    have been coming into Michigan because of the benevolence of
    the Subcommittee number 5 and this work it sent to the full
    Committee.
        That may present a difficult situation.
        So what advice do you witnesses have here for a person in
    my predicament?
        Ms. Sanchez. And I would note that the witnesses have 5
    seconds to answer Mr. Conyers' question. [Laughter.]
        Chairman Conyers. Well, I yield back the balance of my
    time. [Laughter.]
        Ms. Sanchez. If anybody would like to take a crack at that
    briefly?
        Mr. Quam?
        Mr. Quam. Congressman, I think you make a very good point.
    Taking money away from the States right now is a very bad idea.
        States, of course, have to balance their budgets, so taking
    $6 billion out of State economies would actually hinder States'
    ability to recover even from the economic downturn we are in.
        A State such as yours, I think the estimate is almost $500
    million under this bill that would be to be filled by the
    State, a State that is having difficulty.
        And I know that the governor has communicated that to you.
    Governors are always willing to talk. I think discussions can
    be warranted. They have to be balanced.
        Clarity and uniformity has to be balanced against State
    sovereignty and revenue needs. If those discussions can take
    place with balance, there is probably some place to go.
        However, unfortunately, up until now, we haven't had a bill
    with us that suggests that balance.
        I think discussions within that framework are possible.
    They are going to take some work. But I thank you for your
    comments regarding this bill and the condition of States.
        Ms. Sanchez. Mr. Johnson?
        Mr. Johnson. I would just like to make one brief point.
        In my view, this is not so much a business versus States
    bill; this is a multi-state, sophisticated, large business
    versus local business.
        In Utah, every dime we get from the income tax, the
    corporate income tax and the individual income tax, go to
    educate our children.
        We are going to have to get that money from somebody. If we
    can't get it from multi-state businesses, we are going to have
    to get it from our individual taxpayers or our local
    businesses.
        That is, to me, where the rubber hits the road on this one.
        Ms. Sanchez. Thank you.
        Mr. Petricone?
        Mr. Petricone. Mr. Chairman, I appreciate you being here,
    and I appreciate the very articulate way you put forward the
    very legitimate concerns of the States.
        Many of the business we represent are small businesses.
    They are trying to create jobs, and they are trying very hard
    to keep their heads above water in a very, very tough economy.
        And they are being hit by these taxes in States, sometimes,
    they hardly knew they were doing business in.
        And, you know, I am getting calls on a regular basis by
    members who want to know what to do.
        Small businesses operate close to the bone. They are now in
    a position to comply with multiple taxing entities and multiple
    tax jurisdictions.
        So I would simply ask that you and this Committee, you
    know, do everything you can to come up with an environmental
    solution that is fair to the States who have legitimate revenue
    needs but also to businesses and small businesses that are
    trying to create jobs and keep on moving forward.
        Ms. Sanchez. Thank you.
        At this time, I would like to--Mr. Ducharme, did you want
    to add anything?
        At this time, I would like to recognize the gentlewoman
    from California, Ms. Lofgren for 5 minutes of questioning.
        Ms. Lofgren. Thank you, Madam Chairwoman, and thank you for
    holding this hearing.
        I do think the hearing is an important one. There are
    important issues presented by all the witnesses here today.
        I actually think--I co-sponsored the bill. I do think that
    there is lack of clarity in the law on what constitutes
    sufficient nexus for taxation.
        It is pretty clear the Supreme Court is not going to
    provide clarity, so that means that if there is going to be
    some clarity, probably, we need to play a role.
        As Mr. Conyers has just said, and I think you are noting,
    there is room for the States and the business community to come
    together on this issue and reach an agreement.
        And I think, you know, it is possible, but we have a role
    to play in helping that to happen. If so, I am willing to do
    whatever part is necessary. Whether or not agreement is
    reached, I think further exploration would be of enormous
    value.
        You know, my State of California has a $19 billion budget
    deficit and getting larger. I know that if we had the same
    income tax rates that we had when Ronald Reagan was governor,
    basically, we wouldn't have a deficit.
        So there are many things that States can do, and I am
    mindful that it is, oftentimes, easier to tax the guy who isn't
    in your State than the guy who is in your State and who has a
    presence.
        So that is not necessarily the right and responsible way to
    deal with a budget crisis.
        I was in local government--I am only going to be able to
    say this for 6 more months--longer than I have been in the
    House of Representatives, so I am not hostile to the need to
    get revenue into public services. It is very important.
        But we also need to foster a decent business environment.
        I was wanting to see the letter sent by New Jersey.
    Apparently, we don't have a copy of it. Hopefully, we can get
    that later.
        But, Mr. Ducharme, can you explain what the representation
    was made by New Jersey in that letter?
        Mr. Ducharme. Can you clarify for me the initial jeopardy
    assessment letter that we received or the notification?
        Ms. Lofgren. Mr. Johnson said that the State of New Jersey
    had sent a letter for this hearing. Apparently, it cannot be
    found anywhere. Well, you haven't seen it either.
        Mr. Ducharme. We received an acknowledgement letter from
    the State of New Jersey notifying us that we had been scheduled
    a date for the Conference and Appeals Branch.
        Ms. Lofgren. All right.
        Mr. Ducharme. Is that the letter that you are referring to?
        Ms. Lofgren. I don't think that is what Mr. Johnson was
    referring to. Maybe I can ask Mr. Johnson.
        What was in that letter?
        Mr. Johnson. Yes. If I may, I have a copy of a letter that
    is addressed to the Honorable Linda Sanchez from the State of
    New Jersey dated June 18, 2008.
        Ms. Lofgren. I think you are the only one who has that
    letter, so I would love to see it if I could.
        Mr. Johnson. We will certainly be pleased to provide copies
    to the Committee.
        Ms. Lofgren. Maybe the clerk can get it now so I can take a
    gander at it.
        I am wondering, Mr. Petricone, when you talk about
    intangible and the kind of crazy quilt that we have now, why do
    you think that the bill that we are pursuing now actually
    provides the relief that is necessary in terms of uniformity,
    and how will that not disadvantage States?
        Mr. Petricone. Because, Congresswoman, at the very least
    with this bill, everybody is playing under the same rules.
    There is a definition of physical presence; everybody
    understands what it means.
        Small businesses and businesses in general know what their
    liabilities are and who they can be expected to be taxed by.
        The element of certainty is very important to us.
        Ms. Lofgren. It just strikes me that the--our country was
    set up in a way to not constrain commerce between the various
    States because we are the United States of America. We are not
    a pre-E.U. Europe.
        Although this was never intended, perhaps, to disassemble
    that unity. In fact, if you start taxing entities for driving
    through a State, you are burdening, really, the economic entity
    that is the United States.
        So I think this measure is, you know, maybe it is not the
    perfect bill. I am happy to be a co-sponsor, but I think the
    principle--is enormously important, and I think that if the
    parties can come together and come to some agreement, that
    would probably be the best possible outcome because everybody
    has got an incentive.
        I mean, if we move forward, States are just afraid they
    will lose, and I think that is a likely outcome unless we can
    come up with some resolution.
        So I think everybody should be motivated.
        I thank the gentlelady for recognizing me.
        Ms. Sanchez. The time of the gentlelady has expired.
        At this time, I would like to recognize Mr. Feeney for his
    5 minutes of questions.
        Mr. Feeney. Well, I thank the Chairman, and I will be
    brief.
        I was only able to attend the last few minutes of the
    hearing, so I don't want to be duplicitous of anything that has
    been asked.
        I should say that I have been a long-time supporter and co-
    sponsor of the act that is being considered today.
        And I have had a chance to review some of the testimony.
        You know, there is an old rhyme--I spent 12 years in the
    State legislature--that when it comes to raising revenue, the
    best way to do is, according to the rhyme, don't tax you, don't
    tax me, tax the guy behind the tree.
        And unfortunately, the guy behind the tree, all too often,
    is the person who is not there physically to defend himself,
    whether it is in the halls of the lobbyists on the last night
    of a legislative session or whether it is because they
    literally do not have a physical locus in the State.
        And, you know, I would suggest there are a couple
    constitutional protections of the so-called dormant clause to
    the commerce clause which has been resurrected in the Quill
    Case and, of course, I think also the 14th amendment has some
    protections for people that are hit from one State with a tax
    that impacts them.
        Having said that, we have got some States that are
    understandably, including my State of Florida, had to cut
    about, oh, 10 percent of expenditures this year from about a
    $70 billion total State budget to $63 billion.
        So understandably, States are under pressure to raise
    revenues. But I think in order to have a balanced playing field
    to promote interstate commerce and to promote fair play, this
    bill strikes an important balance so that States have plenty of
    revenue options available to them, but basically taxing people
    that do not have a physical presence or, you know, I think has
    some fundamental problems.
        I do note that we have a Florida businessman here, and so
    you have had some experience with New Jersey and, perhaps--have
    you had any other States that have aggressively tried to pursue
    collection of taxes from you?
        Mr. Ducharme. The State of Washington, the State of
    Michigan, the State of New Jersey, and inquiries from South
    Carolina and Maine.
        Mr. Feeney. And given your experience, I guess I would just
    ask you to sort of speculate other types of businesses, maybe
    not boat manufacturers or your specific business, the
    uncertainty in the law with 49 States that you may ship to or
    have ancillary business with but are not physically located in,
    what type of uncertainty--what type of problems does that
    create for a business regardless of where they are actually
    physically located?
        What types of potential problems does that create as you
    are trying to create a business plan, trying to create, plans,
    a manufacturing facility, borrowing money to expand your
    business and, hopefully, create jobs.
        What type of planning dilemmas does that create for a small
    business person trying to grow into a mid-sized business or a
    large business?
        Mr. Ducharme. That is a good question.
        The biggest and most pronounced issue is going to be the
    burden of the accumulated costs that we would incur from hiring
    staff to wrap their arms around and get an understanding the
    various States tax issues.
        Hiring and retaining accountants and tax attorneys and
    attorneys within each State would become a burden that, under
    the current economic situation, would be very difficult to pass
    along in the pricing of our, in our case, our boats.
        Mr. Feeney. Well, I think that is a great point, you know,
    to have 50 different sub-accounting departments and tax-
    planning departments just to make sure you weren't violating
    somebody's laws somewhere would create a horrendous choice for
    small businesses trying to grow and make their products
    available.
        So with that, Madam Chairman, I think this bill, you know,
    strikes a good balance and I thank all of our witnesses and
    would be happy to yield back the balance of my time.
        Ms. Sanchez. The gentleman yields back the balance of his
    time.
        At this time, I would like to recognize the ever-patient
    gentleman from Massachusetts, Mr. Delahunt for 5 minutes.
        Mr. Delahunt. Well, thank you so much for that kind and
    generous introduction.
        I have been attending these hearings--I should direct this
    to the Chair--long before you came to Congress. As Yogi said,
    ``It is deja vu all over again.''
        I am disappointed to hear, Mr. Quam, that your phone rang
    only once since my last admonition.
        Other witnesses have testified, and I concur, that we are
    dealing with a different economy. This is a modern economy. The
    Internet is playing a more and more significant role, and we
    have to adjust.
        But there is also a political reality here, and I think
    you, Mr. Ducharme and Mr. Petricone, have recognized it. That
    is, that nothing is going to happen with this bill until there
    is some accommodations.
        You know, I just hear the arguments so eloquently put
    forward by my friend from Florida about the complexity of it
    all and the burdens that, particularly, small business have to
    endure.
        And the reality is that I think there is sentiment that
    supports dealing with that.
        And I would use the example of the SST--and Mr. Johnson,
    you are very familiar with that, and you are, Mr. Quam--where
    there has been substantial progress made to resolve that in
    favor of the business community to make it more simple.
        But what I see is a lack of political will on the part of
    the stakeholders to come to the table and to achieve a, I
    think, a potential consensus that you can all work with.
        I find it interesting that those that speak out in support
    of the business activity tax reform, let us call it, are
    reluctant to express their support for the streamlined sales
    tax when, really, they are all part of the same concerns.
        There ought to be, I think--and I have said it before--a
    grand solution, if you will.
        Was it you, Mr. Quam or Mr. Johnson, that indicated it is
    about $6-1/2 billion that would be lost revenue?
        Mr. Quam. Yes, sir.
        Mr. Delahunt. What is the amount--what is the projected
    lost revenue to the States as a result of the Quill decision as
    it relates to the collection of the sales or use tax?
        Mr. Quam. Last estimates were around $30 billion.
        Mr. Delahunt. $30 billion. So we would have a factor of
    five there.
        You know, I am sure there are ways to achieve
    reconciliation on all of these issues.
        I don't see this particular proposal--maybe it gets out of
    Committee--but getting it through the Senate and on a
    President's desk, I think you better go back and give it
    another shot and sit down and bring those other stakeholders
    that are not represented here with you to the tab and sit down
    with the governors and begin those conversations that could
    very well lead to a resolution.
        And I think there are people on this Subcommittee and the
    gentlelady from California, Ms. Lofgren, offered her good
    offices. I am sure the Chair of the Subcommittee and the
    Ranking Member would also be willing to participate in,
    somehow, mediating--or navigating is probably a more
    appropriate term--through this difficult, thorny issue.
        Otherwise, you are going to have somebody sitting in this
    very chair 5 years from now, and there will be just be a
    different set of witnesses discussing the same issue.
        So I think Congress is clearly inclined to be supportive,
    however, I don't see it as a major priority for this particular
    Congress.
        The will and the intent has to be generated by those
    impacted.
        With that, I will yield back.
        Ms. Sanchez. The gentleman yields back the balance of his
    time.
        I would now like to recognize my good colleague from the
    State of Georgia, Mr. Johnson for 5 minutes of questions.
        Mr. Johnson of Texas. Thank you, Madam Chair.
        You know, there are various types of cutting instruments.
    You know, you have a meat cleaver that is, perhaps, a very fine
    cutting instrument to a butcher. Then you have a scalpel, which
    is a very fine cutting instrument to a surgeon.
        When one wields a cutting instrument, one must be careful
    with the tool selection.
        And I am not sure that the Supreme Court, on an issue such
    as this, is the kind of cutting instrument that is needed or is
    the type of butcher, if you will, or cutter. They are not the
    exact kind of cutter that is needed.
        Certainly, you don't need a butcher on something like this,
    which means you don't need a meat cleaver.
        And I am not sure that the legislative branch, with, you
    know, 435 House members and 100 Senate members can wield a
    scalpel with the precision that that cutting instrument
    requires.
        But nevertheless, that is what we have. Some would say we
    don't have a scalpel; we have got a meat cleaver and it is just
    435 people with meat cleavers trying to chop something up and
    make something better.
        So I am saying that to say that, you know, the legislative
    branch, we certainly have the power to wield the meat cleaver.
    The judicial branch certainly has the wherewithal to wield a
    meat cleaver as well.
        But it seems to me that with 50 State revenue
    representatives or representatives of States, and with the
    number of organizations that represent large and small
    businesses, it would seem that those entities would get
    together so that they would not fall victim to either the
    congressional or judicial wielding of a cutting instrument.
        You just can't--you don't want to risk that. So this is the
    kind of situation, I think, that cries out for the parties to
    get together, using the offices of the Congress, to facilitate
    something that makes sense because times have changed since our
    constitution was ratified.
        It is a living document, so that means it is going to be
    subject to interpretation depending on the times.
        And certainly, times have changed. The commerce clause has
    held us in good standing and will continue to do so. But it is
    a matter of interpreting the time now and how we can have that
    constitution apply in a way that is efficient for business to
    operate and for America to have businesses, particularly, small
    businesses, that can compete in this global economy.
        Small business is responsible for most of the job creation
    in this country, and I am torn because I support small
    businesses, but yet I am also sensitive to the needs of States
    and local governments to have sufficient revenues to do what we
    have to do to make life better for the people.
        So I am really conflicted. I am a co-sponsor on this bill
    because I do know we have got to have good business for this
    country to remain strong.
        And I will--I think most of the questions have already been
    asked and answered, and I won't ask you to answer them any
    more. But I will offer my humble offices and expertise should
    it be necessary for the parties to be able to sit down and talk
    together.
        I will be happy to do whatever I can to help facilitate
    dialogue and discussion. I will yield back the few moments of
    time that remain.
        Ms. Sanchez. The gentleman yields back.
        We have concluded the hearing for today.
        I want to thank all of the witnesses for their testimony.
        Without objection, Members will have 5 legislative days to
    submit any additional written questions, when we will then
    forward to the witnesses and ask that you respond as quickly as
    you can so that they can also be made a part of the record.
        Without objection, the record will remain open for 5
    legislative days for the submission of any additional
    materials.
        Again, I want to thank everybody for their time and their
    patience.
        And this hearing of the Subcommittee on Commercial and
    Administrative Law is adjourned.
        [Whereupon, at 2:38 p.m., the Subcommittee was adjourned.]

                                A P P E N D I X

                                  ----------

                   Material Submitted for the Hearing Record

             Answers to Post-Hearing Questions from Mark Ducharme,
             Vice President and CFO, Monterey Boats, Williston, FL

    Answers to Post-Hearing Questions from R. Bruce Johnson, Commissioner,
                 Utah State Tax Commission, Salt Lake City, UT

        Answers to Post-Hearing Questions from Michael Petricone, Vice
        President, Technology Policy, Consumer Electronics Association,
                                 Arlington, VA

    Post-Hearing Questions submitted to David C. Quam, Director, Office of
       Federal Relations, National Governors Association, Washington, DC

    --------
    Note: The Subcommittee had not received a response to these questions
    prior to the printing of this hearing.

                      Statements Submitted for the Record